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Question 2 [16 points] Now suppose there is a rating agency in the above bond market. The rating agency evaluates the company that issued the

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Question 2 [16 points] Now suppose there is a rating agency in the above bond market. The rating agency evaluates the company that issued the bond. The buyer can acquire information at cost of $10. Suppose the rating agency announces an AAA rating, i.e. there is a 4% probability that the payoff of the bond is $20. a) Is there trade in equilibrium? If so what is the price the seller is offering? [8 Points] Suppose the rating agency announces a BB rating, i.e. there is a 90% probability that the payoff of the bond is $20. b) Is there trade in equilibrium? If so what is the price the seller is offering? [4 Points] c) How does the rating agency create liquidity in the bond market? Please provide an intuitive explanation. [4 Points]

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